GST Composition Scheme: Complete Guide to Eligibility, Rates & Compliance

The Goods and Services Tax (GST) system in India offers a simplified scheme for small taxpayers known as the Composition Scheme. This scheme aims to reduce the compliance burden and tax liability for eligible businesses, making it easier for them to operate under GST. If you’re a small business owner, understanding the GST Composition Scheme is crucial to determine if it’s the right fit for you.  

This detailed guide covers everything you need to know about the Composition Scheme under GST, including eligibility, conditions, tax rates, benefits, drawbacks, and compliance requirements, with examples to help you understand better.

What is the GST Composition Scheme?

The Composition Scheme is a simple and easy scheme under GST for small taxpayers. It allows eligible businesses to pay GST at a fixed percentage of their turnover, instead of the normal GST rates. This significantly reduces the complexity of GST compliance, as businesses under this scheme are required to file fewer returns and maintain simpler records.  

The primary purpose of the Composition Scheme is to ease the tax burden and compliance load on small businesses, allowing them to focus on their core operations.  

Who Can Opt for the GST Composition Scheme? – Eligibility Criteria

The eligibility for the Composition Scheme is primarily based on the aggregate annual turnover of a business.  

• General Turnover Limit: A registered taxpayer whose aggregate turnover in the preceding financial year did not exceed ₹1.5 crore (₹75 lakhs for Special Category States) can opt for the Composition Scheme in the current financial year.
  • Example: If a business had an aggregate turnover of ₹1.2 crore in the financial year 2023-24, they are eligible to opt for the Composition Scheme in the financial year 2024-25.
    
    
• Service Providers Turnover Limit: For service providers and businesses engaged in both goods and services, the aggregate turnover limit for opting into the Composition Scheme is ₹50 lakhs in the preceding financial year.
  • Example: A consultant providing services with an aggregate turnover of ₹45 lakhs in 2023-24 can opt for the Composition Scheme in 2024-25.

Who Cannot Opt for the Composition Scheme?

Certain businesses are excluded from opting for the Composition Scheme, regardless of their turnover:  

• Manufacturers of certain goods as notified by the Government (e.g., Ice cream, Pan masala, Tobacco).
• Businesses making inter-state outward supplies of goods or services.  
• Businesses making supplies of goods through an e-commerce operator who is required to collect Tax Collected at Source (TCS).
• Casual Taxable Persons or Non-Resident Taxable Persons.  
• Businesses which have purchased goods from an unregistered supplier, unless tax has been paid on such goods on a reverse charge basis.

Conditions and Restrictions under the Composition Scheme

Businesses opting for the Composition Scheme must adhere to certain conditions and restrictions:

• They cannot claim Input Tax Credit (ITC) on the inward supply of goods or services.  
• They cannot issue a tax invoice. They should issue a Bill of Supply.  
• They cannot collect tax from the recipient of supplies. The tax is paid by the business out of their own pocket.  
• They must mention “Composition Taxable Person, not eligible to collect tax on supplies” on their signboards and Bills of Supply.  
• If a taxpayer has multiple GST registrations under the same PAN, all such registered businesses must opt for the Composition Scheme collectively or opt out collectively.  

GST Rates under the Composition Scheme

The GST rates under the Composition Scheme are significantly lower than the normal rates. The applicable rate depends on the category of business:  

• Example (Trader): A trader with a quarterly turnover of ₹30 lakhs will pay GST at 1% of the turnover, which is ₹30,000 (₹15,000 CGST + ₹15,000 SGST).
• Example (Service Provider): A service provider with a quarterly turnover of ₹15 lakhs will pay GST at 6% of the turnover, which is ₹90,000 (₹45,000 CGST + ₹45,000 SGST).

The turnover for calculating the composition tax for manufacturers and traders is the turnover of taxable supplies of goods and services. For service providers and those with mixed supplies, it’s the aggregate turnover.

Benefits of the GST Composition Scheme

Opting for the Composition Scheme offers several advantages for small businesses:

• Lower Tax Liability: The fixed, lower tax rate significantly reduces the overall tax burden compared to normal GST rates.  
• Simple Compliance: Reduced number of returns and simpler record-keeping make compliance easier and less time-consuming.  
• Fewer Returns: Businesses under the Composition Scheme are required to file only one quarterly return (CMP-08) and one annual return (GSTR-4), instead of multiple monthly returns.
• Ease of Doing Business: The simplified procedures allow business owners to focus more on their operations rather than complex tax formalities.  

Drawbacks of the GST Composition Scheme

While beneficial, the Composition Scheme also has certain limitations:

• No Input Tax Credit (ITC): This is a major drawback as businesses cannot claim credit for the GST paid on their purchases. This can increase the cost of raw materials or inputs.  
• Cannot Issue Tax Invoices: Businesses cannot issue tax invoices, which means their buyers (especially registered businesses) cannot claim ITC on the supplies received from them. This might make it less attractive for B2B transactions.  
• Limited Territory for Business: A business registered under the Composition Scheme cannot make inter-state outward supplies. Their business is restricted to within the state.  
• Cannot Supply Certain Goods/Services: As mentioned earlier, manufacturers of certain goods and businesses providing certain services are excluded.  

How to Opt In and Opt Out of the Composition Scheme

Opting In:

A registered taxpayer can opt for the Composition Scheme at the beginning of the financial year by filing Form GST CMP-02 on the GST portal. This intimation must be filed before the commencement of the financial year for which the option is exercised. A new registration can also opt for the Composition Scheme in the registration form itself.  

Opting Out:

A taxpayer can opt out of the Composition Scheme voluntarily or if they cease to satisfy the eligibility criteria. This is done by filing Form GST CMP-04 within seven days of the event that triggers opting out. They will then need to file a statement in Form GST ITC-03 for the details of ITC relating to the stock held within sixty days of opting out.  

Compliance under the GST Composition Scheme

Businesses under the Composition Scheme have a simplified compliance process:

• Quarterly Statement (CMP-08): They need to file a quarterly statement in Form GST CMP-08 by the 18th of the month succeeding the quarter. This statement is a challan for payment of tax.  
  • Example: For the quarter of April to June, CMP-08 is due by July 18th.
    
    
• Annual Return (GSTR-4): They need to file an annual return in Form GSTR-4 by the 30th of April following the financial year.  

Example: For the financial year 2024-25, GSTR-4 is due by April 30th, 2026.